3 simple steps to boost my chances of profiting from this stock market stealth correction

Although indices such as the FTSE 100 and others have been holding up, several individual UK stocks have been crashing.

Recent examples include fashion retailers Boohoo and ASOS, and consumer brands company THG. However, many other UK stocks have been drifting lower too. I’m thinking of names such as medical devices company Smith & Nephew, telecommunications giant BT and parcel-post specialist Royal Mail.

We really are seeing a stealth correction

But that small list doesn’t cover the extent of the weakness beneath the surface in the London stock market. Many steady, defensive and reliable cash-generating businesses are seeing lower stock prices as well. For examples, I’d point to companies such as IT infrastructure and services specialist Computacenter, food ingredients enterprise Tate & Lyle, and meat-based food company Cranswick.

With so many UK stocks struggling right now, it’s no wonder the recent moves in the market add up to what some are calling a ‘stealth correction’. But I think a downwards adjustment to valuations can be a good thing every now and again. And that’s especially true if the businesses behind stocks continue to trade well. After all, not all stock market movements reflect the reality on the ground.

And that’s why stock market setbacks, corrections, crashes and bear markets can provide investors like me with an opportunity to hunt for better value. But, of course, there’s no guarantee I’ll actually find it. Sometimes market reversals prove to be justified. And problems can sometimes emerge in businesses after stocks have adjusted lower.

But there are three simple steps I can take to boost my chances of profiting from this market stealth correction. The main goal is to try to avoid picking a duffer. So when it comes to selecting UK shares, I’d begin my research by applying three checks.

3 checks to help find decent UK shares

The first check is to look for a strong balance sheet. I like well-known investor Lord John Lee’s approach to this. He said in his book How to Make a Million – Slowly that he looks for conservative, cash-rich companies or those with low levels of debt. And I reckon well-financed businesses will likely be in a better position to ride out any business challenges than those loaded with high borrowings.

My second check is to look for a record of robust cash flow. And strong cash flow often supports a good record with revenues and profits as well. Many of my favourite stalwart defensive businesses have a robust trading and financial record.

And I reckon that often speaks volumes about their ability to trade through varying economic conditions. Indeed, they tend to be less vulnerable to the general ups and downs in the economy than some of the more cyclical enterprises.

Thirdly, I like to look for businesses with decent prospects. A good way to begin is by noting the consensus of City analysts’ opinions about growth in forward-looking earnings. However, there’s no substitute for digging into the latest company announcements to see what the directors are saying about the outlook, opportunities and threats for a business.

To me, these three checks are a decent starting point for my research, although they won’t guarantee a successful investment in UK shares. Nevertheless, I think it’s a good time for me to look for share investments right now.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS, Smith & Nephew, and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.